BOK unexpectedly cuts key rate to 3%

Nov 29, 2024, 11:06 am

AsiaToday reporter Lee Choong-jae

The Bank of Korea (BOK) lowered its benchmark interest rate by 25 basis points to 3.0% on Thursday, surprising the market. The decision follows another 0.25 percentage point cut in October. It was also the first time that the central bank lowered its key interest rate for two consecutive months since the series of cuts delivered during the 2008-2009 global financial crisis.

The BOK’s surprise rate cut comes amid slowing exports, sluggish domestic consumption, and uncertainties stemming from the new Trump administration. In fact, the BOK has slashed the growth forecast for this year from 2.4 percent to 2.2 percent. The South Korean economy narrowly avoided a technical recession in the third quarter with a disappointing 0.1 percent gain from the Q2. The increase follows a small decrease in Q2 and a large upturn in Q1.

The outlook for next year is dimmer. The BOK lowered its inflation forecasts for 2025 by 0.2 percentage point to 1.9 percent. Foreshadowing a slow economy with sluggish domestic demand and exports, it suggested a 1.8 percent growth forecast for 2026.

With the prospect of the country’s economy facing a “low growth shock” below the potential growth rate of 2.0 percent, the BOK’s Monetary Policy Committee judged that it is necessary to boost private consumption and investment by lowering the key interest rate and release money on the market. “While inflation had stabilized, the downward pressure on the economy had intensified. The Board, therefore, judged that it is appropriate to further cut the Base Rate and mitigate downside risks to the economy,” the BOK said in its statement. During a press conference following the committee meeting, Governor Rhee Chang-yong cited increased economic and inflation uncertainties stemming from the new U.S. administration’s economic policies as the rationale for the rate cut. “As uncertainties in the growth path have increased, the benchmark interest rate needs to be further adjusted,” he said.

The governor said the growth engine of the Korean economy would slow down gradually. “The growth forecasts for this year and next year have been revised downward in light of slower-than-expected export growth due to intensifying competition with major countries in key industries and strengthening trade protectionism.”

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